Rhode Island Hospital v. Leavitt

United States Court of Appeals
For the First Circuit

No. 07-2673

RHODE ISLAND HOSPITAL,

Plaintiff, Appellee,

v.

MICHAEL O. LEAVITT, in his capacity as Secretary of Health and
Human Services; DEPARTMENT OF HEALTH AND HUMAN SERVICES,

Defendants, Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Ernest C. Torres, U.S. District Judge]

Before

Torruella, Baldock,* and Howard,
Circuit Judges.

Robert D. Kamenshine, Appellate Section, Civil Division,
United States Department of Justice, with whom Gregory G. Katsas,
Acting Assistant Attorney General, Robert Clark Corrente, United
States Attorney, Scott R. McIntosh, Appellate Section, Civil
Division, United States Department of Justice, James C. Stansell,
Acting General Counsel, United States Department of Health and
Human Services, Nancy S. Nemon, Chief Counsel, Region I, United
States Department of Health and Human Services, and Clifford M.
Pierce, Assistant Regional Counsel, Region I, United States
Department of Health and Human Services, were on brief, for
appellant.
Robert G. Flanders, with whom Mitchell R. Edwards, Hinckley,
Allen & Snyder LLP, Lawrence W. Vernaglia, and Foley & Lardner LLP
were on brief, for appellee.

*
Of the Tenth Circuit, sitting by designation.
November 17, 2008
 BALDOCK, Circuit Judge. Congress established the

Medicare program in 1966 to provide health insurance to the elderly

and disabled. See 42 U.S.C. § 1395 et seq. Part A of that program

covers, inter alia, expenses related to inpatient hospitalization.

The amount Medicare pays for these services is generally determined

under the prospective payment system (PPS). See Robert Wood

Johnson Univ. Hosp. v. Thompson, 297 F.3d 273, 275 (3d Cir. 2002).

Under that system, Medicare reimburses healthcare providers

according to predetermined rates, which correspond primarily to a

patient’s diagnosis at discharge.1 See Bellevue Hosp. Ctr. v.

Leavitt, 443 F.3d 163, 168 (2d Cir. 2006).

Congress recognized, however, that not all inpatient

healthcare costs are created equal. Of particular relevance here,

Congress was concerned that teaching hospitals would incur greater

costs in treating patients than would non-teaching hospitals. See

H.R. Rep. No. 98-25, part 1, at 140 (1983), as reprinted in 1983

1
Under the prospective payment system, Medicare does not
reimburse healthcare providers according to the costs they actually
incur in treating Medicare patients. See Bellevue Hosp. Ctr., 443
F.3d at 168. Rather, Medicare payments are based on predetermined
rates. These rates reflect the resources an efficiently run
hospital, in the same region, would regularly expend in treating a
patient with the same diagnosis at time of discharge. See Robert
Wood Johnson, 297 F.3d at 275-76; Legacy Emanuel Hosp. & Health
Ctr. v. Shalala, 97 F.3d 1261, 1262 (9th Cir. 1996); see also 42
C.F.R. § 412.2. If a hospital treats a given patient for less than
that predetermined rate, it reaps a profit. See Bath Mem’l Hosp.
v. Me. Health Care Fin. Comm’n, 853 F.2d 1007, 1011 (1st Cir.
1988). But if a hospital provides treatment at a higher rate, it
incurs a loss. See id. Thus, the prospective payment system
provides a powerful incentive for providers to maximize the
efficiency of their treatment programs. See Robert Wood Johnson,
297 F.3d at 175.

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U.S.C.C.A.N. 219, 359; S. Rep. No. 98-23, at 52 (1983), as

reprinted in 1983 U.S.C.C.A.N. 143, 192. To remedy this inequity,

Congress established an indirect medical education (IME) adjustment

to increase Medicare payments to acute care teaching hospitals.

See 42 U.S.C. § 1395ww(d)(5)(B).2

The formula Medicare uses to calculate a teaching

hospital’s IME adjustment is fairly complex. See 42 U.S.C.

§ 1395ww(d)(5)(B). For our purposes, it is sufficient to say that

a teaching hospital’s annual IME adjustment is calculated by

multiplying the hospital’s total PPS payments for the fiscal year

by its “teaching adjustment factor.” See id. An important

variable in the calculation of this “teaching adjustment factor” is

a hospital’s ratio of full-time equivalent (FTE) residents to its

total number of beds.3 See id.

A hospital’s total number of beds appears to serve as a

proxy for the size of its medical staff. See County of Los Angeles

v. Leavitt, 521 F.3d 1073, 1076 n.2 (9th Cir. 2008) (citing Little

Co. of Mary Hosp. and Health Care Ctrs. v. Shalala, 165 F.3d 1162,

1164 (7th Cir. 1999)). The higher a hospital’s ratio of FTE

residents to staff, the more teaching each individual staff member

2
This case involves Rhode Island Hospital’s IME adjustment
for the 1996 fiscal year. Both parties agree that we must apply
applicable law as it stood in 1996. Accordingly, all citations in
this opinion, unless otherwise noted, are to the 1996 version of
the United States Code and the Code of Federal Regulations.
3
For brevity’s sake, we use the term “residents” to refer to
both interns and residents throughout this opinion.

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will be doing. See id. Thus, as this ratio increases, so does a

hospital’s “teaching adjustment factor” and, ultimately, the IME

payment a hospital receives from Medicare. See id. at 1076; see

also H.R. Rep. No. 99241, part 1, at 14 (1985), as reprinted in

1986 U.S.C.C.A.N. 579, 592 (noting the increase in a hospital’s IME

payment “var[ies] directly” with its “ratio of interns and

residents to its number of beds”).

The issue in this case is whether governing

administrative and statutory provisions allow the Secretary of the

United States Department of Health and Human Services (the

Secretary) to exclude time that residents spend performing research

unrelated to patient care from a hospital’s FTE count. See 42

C.F.R. § 412.105(g)(1); 42 U.S.C. § 1395ww(d)(5)(B). The district

court answered this question in the negative and the Secretary

appealed. We have jurisdiction to decide this issue under 12

U.S.C. § 1291. Because we conclude the Secretary’s interpretation

of the FTE regulation is permissible, we reverse the ruling of the

district court and remand for further proceedings not inconsistent

with this opinion.

I.

Rhode Island Hospital (RIH or the hospital) is an acute

care facility located in Providence, Rhode Island with a large

graduate medical education program. For the 1996 fiscal year, RIH

requested that its fiscal intermediary — a private insurance

company Medicare contracts to pay certain bills — include 290 FTEs

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in its calculation of the hospital’s IME adjustment. Based on its

conclusion that governing Medicare regulations precluded counting

research time in a hospital’s FTE count, the fiscal intermediary

reduced RIH’s FTE total by 12.06. This exclusion reduced the

hospital’s IME adjustment by approximately one million dollars.

RIH appealed the fiscal intermediary’s decision to the

Provider Reimbursement Review Board (PRRB), which is composed of

“representative[s] of providers” and other persons “knowledgeable

in the field of” provider payments. 42 U.S.C. § 1395oo(h). After

a formal hearing, the PRRB reversed the fiscal intermediary’s

decision. The board concluded the administrative regulation

governing a hospital’s FTE count (the FTE regulation) was

unambiguous and that this regulation did not exclude residents’

purely educational research time from a hospital’s FTE count. See

42 C.F.R. § 412.105(g)(1).

The Secretary, acting through the Administrator of the

Centers for Medicare and Medicaid Services, exercised his right to

review the PRRB’s decision. See 42 U.S.C. § 1395oo(f)(1). After

receiving comments from all interested parties, the Secretary

determined that the IME payment made by Medicare was only intended,

and had historically only been used, to reimburse teaching

hospitals for increased patient care costs. The Secretary also

concluded that residents performing educational research were not

assigned to an eligible area of the hospital under the governing

FTE regulation. Accordingly, the Secretary ruled that the time

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residents spend performing research unrelated to patient care could

not contribute to a teaching hospital’s total number of FTEs.

RIH appealed the Secretary’s decision to the United

States District Court for the District of Rhode Island. See id.

Ultimately, both RIH and the Secretary moved for summary judgment.

In granting RIH’s motion and denying that of the Secretary, the

district court concluded the Secretary had misread the plain

language of the governing FTE regulation. See 42 C.F.R.

§ 412.105(g)(1). The district court also made an alternative

holding that even if the Secretary’s reading of the FTE regulation

was reasonable in the abstract, such a reading was unreasonable in

light of Congress’s purpose in establishing the IME adjustment. On

appeal, the Secretary contests both of these conclusions.

II.

Our review of a district court’s summary judgment ruling

is de novo. See Visiting Nurse Ass’n Gregoria Auffant, Inc. v.

Thompson, 447 F.3d 68, 72 (1st Cir. 2006). We thus apply the same

legal standards that pertain in the district court, affording no

particular deference to that court’s decision. See id. The

strictures of the Administrative Procedure Act (APA) govern

judicial review of the Secretary’s reimbursement determination.

See 42 U.S.C. § 1395oo(f)(1); see also Visiting Nurses Ass’n, 447

F.3d at 72. Accordingly, our review of the Secretary’s ruling is

conducted through the narrow lens of a colored glass. See Visiting

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Nurses Ass’n, 447 F.3d at 72; Strickland v. Comm’r, 48 F.3d 12, 16

(1st Cir. 1995).

Under the APA, agency action is presumptively valid and

we may only overturn an agency decision if it is “arbitrary,

capricious, an abuse of discretion, or otherwise not in accordance

with law.” See Visiting Nurse Ass’n, 447 F.3d at 72 (quoting 5

U.S.C. § 706(2)(A)). This standard precludes a reviewing court

from substituting its own judgment for that of the agency. See

Carcieri v. Kempthorne, 497 F.3d 15, 43 (1st Cir. 2007). Of

course, we will not uphold an administrative decision contrary to

the “unambiguously expressed intent of Congress.” Strickland, 48

F.3d at 16. “If the intent of Congress is clear, that is the end

of the matter . . . .” Id. But in many cases no “unmistakably

clear expression of congressional intent” exists. Id. at 17; see

also United States v. Councilman, 418 F.3d 67, 88 (1st Cir. 2005)

(noting that legislative history is “often murky, ambiguous, and

contradictory” (quoting Exxon Mobil Corp. v. Allapattah Servs.,

Inc., 545 U.S. 546, 568 (2005))).

In these circumstances, courts defer to the views of the

agency Congress has entrusted with relevant rule-making authority,

affording “considerable deference” to the agency’s interpretation

of regulations promulgated under that authority. Royal Siam Corp.

v. Chertoff, 484 F.3d 139, 145 (1st Cir. 2007). Judicial deference

is further magnified in cases involving “complex and highly

technical” administrative programs, such as Medicare. Visiting

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Nurse Ass’n, 447 F.3d at 76; see also Stowell v. Sec’y of Health &

Human Servs., 3 F.3d 539, 544 (1st Cir. 1993) (“Courts should not

cavalierly discount the value of agency expertise painstakingly

garnered in the administration, over time, of [administrative]

programs of remarkable intricacy.”). To receive this deference,

the agency need not “write a rule that serves the statute in the

best or most logical manner; it need only write a rule that flows

rationally from a permissible construction of the statute.”

Strickland, 48 F.3d at 17.

Judicial review under the APA thus consists of

establishing “parameters of rationality within which the agency

must operate.” South Terminal Corp. v. EPA, 504 F.2d 646, 665 (1st

Cir. 1974). So long as an agency’s decision is rational and based

on regulations promulgated after all the requisite “procedural

corners” have been “squarely turned,” we will uphold that decision

provided it does “not collide directly with substantive statutory

commands.” Citizens Awareness Network, Inc. v. U.S. Nuclear

Regulatory Comm’n, 59 F.3d 285, 290 (1st Cir. 1995). We abstain

from this deferential approach only when the agency’s

interpretation of its regulation is “plainly erroneous or

inconsistent with its language.” Visiting Nurse Ass’n, 447 F.3d at

72.

III.

At issue in this case is the Secretary’s reading of

42 C.F.R. § 412.105(g)(1), which sets forth the type of resident

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activities Medicare will include in its calculation of a teaching

hospital’s FTE count. This regulation contains two basic

requirements. First, a resident must “be enrolled in an approved

teaching program.” 42 C.F.R. § 412.105(g)(1)(i). Second, a

resident must “be assigned to one of the following areas:” (1) the

“portion of the hospital subject to the prospective payment

system,” (2) the “outpatient department of the hospital,” or

(3) certain entities under the “ownership or control of the

hospital,” if the hospital incurs “all, or substantially all, of

the costs of the services furnished by those residents.” Id.

§ 412.105(g)(ii). The regulation also provides that FTE status “is

based on the total time necessary to fill a residency slot.” Id.

§ 412.105(g)(1)(iii). Medicare counts a resident “working” in an

ineligible “area” of the hospital as a partial FTE “based on the

proportion of time” he or she is “assigned” to an eligible “area”

of the hospital. Id. § 412.105(g)(1).

The Secretary does not dispute that all of the residents

for which RIH requested FTE credit are enrolled in an approved

teaching program. Rather, the Secretary contends that residents

assigned to perform educational research, i.e. research unrelated

to patient care, are, by definition, not “assigned” to an “area” or

“portion of the hospital subject to the prospective payment

system.” Id. § 412.105(g)(1)(ii). This reading of the FTE

regulation has a certain appeal.

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 Medicare utilizes the prospective payment system to pay

hospitals “for operating costs for inpatient hospital services.”

42 C.F.R. § 412.6(a)(1). Although purely educational research

results in additional “operating costs” for teaching hospitals,

those costs are not directly related to “inpatient hospital

services.” Id. As if to make this distinction clear, Congress

specifically excluded the “costs of approved educational

activities” from its definition of the “operating costs of

inpatient hospital services” that are reimbursable by Medicare. 42

U.S.C. § 1395ww(a)(4).

The hospital responds that the FTE regulation does not

require that the work a resident performs be reimbursable under the

prospective payment system. Instead, the regulation mandates that

a resident “be assigned” to an “area” or “portion” of the hospital

that is subject to the prospective payment system. Reading this

language in geographic terms, RIH argues the words “area” and

“portion” simply refer to all units of a hospital complex not

specifically excluded from PPS billing. See American Heritage

Dictionary (4th ed. 2006)(defining “area” as a “roughly bounded

part of the space on a surface; a region”); id. (defining “portion”

as a “section or quantity within a larger thing; a part of a

whole”);4 see also Robert Wood Johnson, 297 F.3d at 275

4
“Dictionaries of the English language are a fundamental
tool in ascertaining the plain meaning of terms used in statutes
and regulations.” United States v. Lachman, 387 F.3d 42, 51 (1st
Cir. 2004).

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(recognizing that Medicare pays for most inpatient services through

the prospective payment system).

Under the hospital’s view, the nature of a resident’s

work is immaterial. As long as a resident is assigned to an area

of the hospital not specifically excluded from PPS billing, that

resident’s work counts towards a hospital’s total number of FTEs.5

See Webster's Revised Unabridged Dictionary (1996) (defining

“assign” as to “to allot; to apportion”); see also 42 C.F.R.

§ 412.25 (addressing hospital units, such as psychiatric and

rehabilitation units, excluded from PPS billing). The Secretary

concedes that the hospital’s interpretation of the FTE regulation

is plausible. At the same time, the Secretary offers a functional

reading of the regulation’s text, which supports his decision to

exclude residents’ purely educational research time from the

hospital’s FTE count.

A cursory review of a dictionary reveals that “assign”

and “area” often have a functional connotation. See American

Heritage Dictionary (4th ed. 2006) (defining “assign” as to “set

apart for a particular purpose,” “select for a duty,” or to “give

out as a task”); id. (defining “area” as a “distinct part or

section, as of a building, set aside for a specific function,” or

a “division of experience, activity, or knowledge”). Accordingly,

5
These excluded units continued to bill Medicare under the
old reasonable cost system. Under this system, a unit’s IME costs
are automatically factored into the payments it receives from
Medicare. See infra Part IV (describing the reasonable cost
billing system).

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the Secretary suggests that to be “assigned” to a “portion” of the

hospital subject to the prospective payment system a resident must

be integrated into a hospital unit dedicated to a form of patient

care subject to PPS billing.6 See Webster's Revised Unabridged

Dictionary (1996) (defining “portion” as a “part considered by

itself, though not actually cut off or separated from the whole”).

The residents at issue in this case were “assigned” to a

research rotation during which they conducted purely educational

research, presumably in a lab. As such, they were not integrated

into a unit of the hospital dedicated to patient care services that

are reimbursable under the prospective payment system.

Accordingly, the Secretary maintains the hours these residents

engaged in purely educational research do not count towards RIH’s

total number of FTEs.

In light of the various definitions of 42 C.F.R.

§ 412.105(g)(1)(ii)’s key terms, neither party’s interpretation of

the FTE regulation is completely beyond the pale.7 Because the FTE

6
The fact that Medicare’s PPS billing applies only to
inpatient (i.e., patient care) services may reasonably be read into
the FTE regulation’s language regarding the prospective payment
system. See 42 C.F.R. § 412.6(a)(1); id. § 412.105(g)(1)(ii)(A).
Accordingly, if one adopts a functional definition of the FTE
regulation’s key terms, one may fairly read that provision as
incorporating a patient care requirement. The hospital’s assertion
that a patient care requirement is unsupported by the FTE
regulation’s text is thus without merit.
7
We recognize that other courts have reached the opposite
conclusion. See Univ. Med. Ctr. Corp. v. Leavitt, No. 05-495, 2007
WL 891195, at *2 (D. Ariz. Mar. 21, 2007) (unpublished); Riverside
Methodist Hosp. v. Thompson, No. C2-02-94, 2003 WL 22658129, at *6
(S.D. Ohio July 31, 2003) (unpublished). For the reasons explained

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regulation’s language “admits of more than one reasonable

interpretation,” it is ambiguous. Gen. Motors Corp. v. Darling’s,

444 F.3d 98, 108 (1st Cir. 2006); see also South Shore Hosp., Inc.

v. Thompson, 308 F.3d 91, 100 (1st Cir. 2002) (refusing to ignore

the “patent ambiguity” of a regulatory provision). We give effect

to an agency’s interpretation of its own ambiguous regulation so

long as that interpretation is reasonable. See Visiting Nurse

Ass’n, 447 F.3d at 72-73. To be reasonable, an agency’s reading of

a regulatory provision must sensibly conform to that regulation’s

wording and purpose. See id.

In this case, we cannot say the Secretary’s

interpretation of the FTE regulation is unnatural or strained.

Hospitals are routinely divided along functional lines. Even a

layperson is readily familiar with, for example, a hospital’s

cardiac unit or its psychiatric ward. See Onujiogu v. United

States, 817 F.2d 3, 5 (1st Cir. 1987) (noting that “the law is not

so struthious as to require courts to ignore the obvious”). These

areas or portions of the hospital are defined by the services, or

types of patient care, they provide. Thus, the Secretary’s

functional reading of the FTE regulation is entirely plausible.8

above, we disagree with their holding that only one reasonable
interpretation of the FTE regulation exists.
8
Acute care hospitals are facilities dedicated to providing
inpatient care. One could logically assume that residents assigned
to such hospitals are engaged in patient-care activities.
Ostensibly, this is one reason why Congress did not include an
explicit patient-care requirement when it established an IME
adjustment for acute care hospitals, but imposed such an explicit

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 Our conclusion is not altered by the FTE regulation’s

additional requirement that a resident “be enrolled in an approved

teaching program.” 42 C.F.R. § 412.105(g)(1)(i); see also Skidgel

v. Me. Dep’t of Human Servs., 994 F.2d 930, 937 (1st Cir. 1993)

(recognizing that to determine the meaning of a provision courts

examine its “context” to ascertain that provision’s place in the

greater legal “scheme”). As part of RIH’s approved educational

program, residents must perform scholarly research. The hospital

suggests that it would be anomalous for the FTE regulation to

specifically require a resident be enrolled in an approved teaching

program, and then exclude research time required by that program

from a hospital’s FTE count.

All the text of § 412.105(g)(1)(i) indicates, however, is

that Medicare does not wish to include residents registered in

unapproved, and thus untested, educational programs in a hospital’s

FTE count. Certainly nothing in that section mandates the

Secretary read every element of the FTE regulation in the light

most favorable to a hospital’s approved teaching programs. While

such an interpretation may, or may not, be desirable as a matter of

public policy, “policy choices” are generally “for the agency, not

the court[s], to make.” Associated Fisheries of Me., Inc. v.

requirement when it later extended the adjustment to non-hospital
settings. Compare 42 U.S.C. § 1395ww(d)(5)(B) (2008), with 42
U.S.C. § 1395ww(d)(5)(B)(iv) (2008). Residents assigned to non-
hospital settings, i.e., settings not exclusively dedicated to
patient-care activities, are, by default, more likely to engage in
activities unrelated to the care of patients.

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Daley, 127 F.3d 104, 109 (1st Cir. 1997); see also Strickland, 48

F.3d at 17 (explaining the agency need not adopt the “best” rule,

only a rational one).

The hospital has also failed to demonstrate that adhering

to the Secretary’s reading of 42 C.F.R. § 412.105(g)(1) would

necessarily lead to absurd results. See Dantran, Inc. v. U.S.

Dep’t of Labor, 171 F.3d 58, 65 (1st Cir. 1999) (acknowledging that

courts are reluctant to adhere to an agency’s reading of a

regulation when that reading would “lead to absurd results”). For

example, the hospital claims the Secretary’s interpretation of the

FTE regulation would render a department subject to the prospective

payment system one minute, i.e. when a resident is engaged in

patient care, and not subject to the prospective payment system the

next, i.e. when a resident is engaged in educational research. We

are not presented, however, with a factual scenario in which

residents routinely performed purely educational research while

assigned to patient care units, and no evidence exists in the

record that this is often the case. To the contrary, the record

reflects that the residents at issue here were assigned to a

research rotation, the purpose of which is to provide residents a

concentrated period of time to conduct scholarly research. See,

e.g., Joint Appendix (App.) at 860-70. Thus, the hypothetical

problem posed by the hospital is inapposite. See United States v.

Dickerson, 514 F.3d 60, 65 (1st Cir. 2008) (noting that counsel

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must “present the court with something more than hypotheticals with

no support in the record”).

The hospital also argues that under the Secretary’s

interpretation of the FTE regulation no resident would ever qualify

as a full FTE because all residents are required to participate in

activities, such as educational research and attending classes,

which are unrelated to patient care.9 What the hospital fails to

mention is that a hospital’s Director of Graduate Medical

Education, not Medicare, is the party empowered with determining

the “total time necessary to fill a residency slot.” See 42 C.F.R.

§ 412.105(g)(1)(iii); App. at 10. Presumably, the director could

limit this calculation to the number of work hours required to fill

a single resident position on a hospital’s staffing calendar.10 See

Merriam-Webster Dictionary (2008) (defining “slot” as “an

assignment or job opening; position”).

9
The hospital’s quarrel in this regard reflects more of a
dissatisfaction with the use of the FTE count in determining a
hospital’s IME adjustment than it does any pressing controversy
over the Secretary’s means of determining a hospital’s number of
FTEs. Commentators, as early as 1984, voiced similar concerns. 49
Fed. Reg. 234, 268 (Jan. 3, 1984). For instance, commentators
noted that residents “are students and not employees” and suggested
Medicare count them “on the basis of ‘assigned time’ rather than on
the basis of full-time employee status,” as they believed “payroll
status [was] not an accurate determinant of the number of . . .
residents actually working at [a] hospital.” Id.
10
Indeed, the record suggests the hospital may have limited
its calculation of the total time necessary to fill a residency
slot in some manner. See App. at 1034 (explaining that RIH’s
Director of Medical Education, Dr. John Murphy, testified residents
worked 70-75 hours per week, but a study conducted by the hospital,
in advance of the present suit, indicated residents worked only 50
hours per week).

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 As far as educational research is concerned, the record

does not suggest that a resident is assigned to a research rotation

at regular intervals. See, e.g., App. at 25 (mandating that each

resident demonstrate “some form of acceptable scholarly activity”

before the “completion” of his or her training); id. at 58 (“The

curriculum should include resident experience in scholarly activity

prior to completion of the program.”). Hypothetically, Medicare

could, for example, reasonably refuse to count an otherwise “full

time resident” as an FTE during the year in which she fulfilled her

mandatory scholarly research requirement. That resident would then

qualify as an FTE for the remaining term of her residency, as her

work would help to satisfy a hospital’s regular staffing

requirements. We cannot say that such an arrangement would render

the Secretary’s interpretation of the FTE regulation anomalous.11

In sum, 42 C.F.R. § 412.105(g)(1)(ii) is ambiguous. The

Secretary’s reading of that regulation is not plainly erroneous or

inconsistent with its language. See Visiting Nurse Ass’n, 447 F.3d

at 72. Consequently, we will defer to the Secretary’s

interpretation of the FTE regulation unless that interpretation

conflicts with substantive statutory commands or the FTE

11
To be clear, the purpose of the examples we have given is
not to proclaim their accuracy. These hypotheticals merely
demonstrate the hospital’s failure to show that applying the
Secretary’s reading of the FTE regulation would necessarily lead to
absurd results. See Visiting Nurse Ass’n, 447 F.3d at 72 (noting
that, under the APA, courts presume the validity of agency action).

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regulation’s underlying purpose.12 See id. at 72-73; Citizens

Awareness Network, Inc., 59 F.3d at 290; see also La Casa Del

Convaleciente v. Sullivan, 965 F.2d 1175, 1178 (1st Cir. 1992)

(“Deference is particularly appropriate in an area that is as

complex as the field of Medicare reimbursement.”).

IV.

We now turn to the statutory basis for the FTE regulation

at issue. See 42 U.S.C. § 1395ww(d)(5)(B). To cogently discuss

the relevant subsection, we must first examine the IME adjustment’s

history and the means by which the Secretary previously reimbursed

Medicare providers. In general, that entails a discussion of the

reasonable cost billing system, which governed provider payments at

Medicare’s inception.

Under the reasonable cost system, Medicare paid hospitals

the “reasonable cost,” 42 U.S.C. § 1395f(b)(1), of “inpatient

hospital services.” Id. § 1395d(a)(1). Medicare considered a

hospital’s “reasonable cost” to be the cost the hospital “actually

12
The hospital also asserts the Secretary’s functional
interpretation of the FTE regulation is merely a “litigation
position” to which we should not accord deference. See Alliance to
Protect Nantucket Sound, Inc. v. U.S. Dep’t of Army, 398 F.3d 105,
112 n.5 (1st Cir. 2005) (noting that “deference is not due to
interpretations that are post hoc rationalizations offered by an
agency seeking to defend past agency action against attack”). What
the hospital fails to appreciate is that the Secretary’s
interpretation of his own regulations in an “administrative
adjudication” is “agency action, not a post hoc rationalization of
it.” Fed. Labor Relations Auth. v. U.S. Dep’t of Navy, 941 F.2d
49, 59 (1st Cir. 1991). No indication exists that the Secretary
“forfeited [his] entitlement to deference here.” Royal Siam Corp.,
484 F.3d at 146.

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incurred,” minus any portion of that cost it deemed “unnecessary in

the efficient delivery of needed health services.” Id.

§ 1395x(v)(1)(A). Because medicare payments were predicated on a

hospital’s actual expenditures, the reasonable cost system

automatically reimbursed teaching hospitals for IME costs related

to their teaching programs. See id.; 48 Fed. Reg. 39,752, 39,778

(Sept. 1, 1983) (noting that “reasonable cost” payments “already

include the indirect costs of medical education”).

Government costs under the pure reasonable cost system,

however, were inordinately high. To save money, Congress

authorized the Secretary to place “limits” on providers’

reimbursements. See 42 U.S.C. § 1395x(v)(1)(A); see also 42 C.F.R.

§ 413.30. These limits reflected Medicare’s estimate of what a

provider should spend “in the efficient delivery of needed health

services.” 42 U.S.C. § 1395x(v)(1)(A). The Secretary promulgated

these cost limits, otherwise known as section 223 limits, in the

Federal Register. See generally 46 Fed. Reg. 48,010 (Sept. 30,

1981); 45 Fed. Reg. 41,868 (June 20, 1980).

Medicare’s new reasonable cost limits failed to take

into account, however, the indirect costs of hospitals’ teaching

programs. See 45 Fed. Reg. 21,582, 21,584 (April 1, 1980).

Consequently, the Secretary established an “automatic adjustment“

to account specifically for teaching hospitals’ increased “general

inpatient routine operating costs.” Id. This adjustment depended

-20-
on the level of a hospital’s “teaching activity.”13 Id. The

greater a hospital’s teaching activity, the greater the increase in

that hospital’s reasonable cost limits. See id. Much like the

present system, a hospital’s level of “teaching activity” depended,

in large part, upon the ratio of its FTE residents to beds. See

id. Under the modified reasonable cost system, however, Medicare

measured a teaching hospitals total number of FTEs simply by

determining the number of eligible residents employed at the

hospital on a prescribed date. See 47 Fed. Reg. 43,296, 43,310

(Sept. 30, 1982); 46 Fed. Reg. 48,010, 48,013 (Sept. 30, 1981); 45

Fed. Reg. 21,582, 21,584 (April 1, 1980).

In 1983, Congress passed legislation establishing the

prospective payment system for Medicare reimbursement, which

largely displaced reasonable cost billing. See Social Security

Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149

(1983); see also supra note 1 and accompanying text (describing the

prospective payment system). As part of that legislation, Congress

statutorily adopted the IME adjustment, which the Secretary created

years earlier. The relevant portion of the statute reads: “The

Secretary shall provide for an additional payment amount for [acute

care hospitals] with indirect costs of medical education, in an

amount computed in the same manner as the adjustment for such costs

13
The Secretary’s statistical analysis demonstrated “a high
degree of correlation between a hospital’s level of general
inpatient routine operating costs and the extent of its teaching
activity.” 45 Fed. Reg. 21,582, 21,584 (April 1, 1980); see also
47 Fed. Reg. 43,296, 43,302 (Sept. 30, 1982).

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under regulations (in effect as of January 1, 1983) under

subsection (a)(2) of this section . . . .”14 42 U.S.C.

§ 1395ww(d)(5)(B).

Under the modified reasonable cost system, the Secretary

instituted the IME adjustment through notices published in the

Federal Register. None of these notices appeared, however, in the

Code of Federal Regulations. Therefore, we are immediately faced

with an ambiguity in the statute’s text. See id.

A “regulation” is often defined as a generally applicable

statement that has the legal effect of binding an agency or other

parties. See,e.g., Kennecott Utah Copper Corp. v. U.S. Dep’t of

Interior, 88 F.3d 1191, 1207 (D.C. Cir. 1996). By law, the

Director of the Federal Register is required to publish each

federal regulation of “general applicability and legal effect” in

the Code of Federal Regulations. 1 C.F.R. § 8.1 (2008); see also

44 U.S.C. § 1510 (defining the “Code of Federal Regulations” as a

“complete codification[] of the documents of each agency of the

Government having general applicability and legal effect”).

Because the IME provisions the Secretary promulgated under the

modified reasonable cost system were not included in the Code of

Federal Regulations, the Secretary now suggests no “regulations”

14
Subsection (a)(2) gives the Secretary the authority to
create exemptions, exceptions, and adjustments to the cost limits
Congress mandated in subsection (a)(1). See 42 U.S.C.
§ 1395ww(a)(2).

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were in effect, under subsection (a)(2), as of January 1, 1983.

See 42 U.S.C. § 1395ww(d)(5)(B).

We need not speculate in this regard. The statute’s

legislative history makes clear that Congress intended to create an

adjustment similar to the one the Secretary applied under the

modified reasonable cost system.15 As such, the “regulations”

Congress had in mind were clearly those the Secretary published in

the Federal Register.16 The statutory IME provision thus instructs

the Secretary to “compute[]” a teaching hospital’s IME adjustment

“in the same manner” as the Secretary calculated that adjustment in

January 1, 1983, with certain delineated exceptions. 42 U.S.C.

§ 1395ww(d)(5)(B).

The hospital takes a broad view of the statutory

language. Indeed, it suggests the Secretary is statutorily

required to determine the FTE variable in the IME calculus in the

15
See H.R. Rep. No. 98-25, pt. 1, at 140 (1983), as reprinted
in 1983 U.S.C.C.A.N. 219, 359 (stating that, “with respect to” IME
expenses, the Social Security Amendments of 1983 would provide an
adjustment “equal to twice the teaching adjustment” applied under
the modified reasonable cost system); see also S. Rep. No. 98-23,
at 52 (1983), as reprinted in 1983 U.S.C.C.A.N. 143, 192 (noting
that the Social Security Amendments of 1983 provide for an
adjustment “equal to twice the adjustment used in connection with”
the modified reasonable cost system).
16
The hospital cites the principle that “a reviewing court,
in dealing with a determination or judgment which an administrative
agency alone is authorized to make, must judge the propriety of
such action solely by the grounds invoked by the agency.” Kurzon
v. U.S. Postal Serv., 539 F.2d 788, 792 (1st Cir. 1976) (quoting
SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)). We simply note
that statutory interpretation does not fall within the category of
decision-making that an “agency alone is authorized to make.” Id.

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same manner the Secretary computed that variable in January 1983.

Our reading of the statute’s text and its legislative history,

however, leads us to adopt a narrower view. See United States v.

Charter Int’l Oil Co., 83 F.3d 510, 517 (1st Cir. 1996) (noting

that “where the statute is ambiguous, legislative history may be

considered” (citing Lomas Mortgage, Inc. v. Louis, 82 F.3d 1, 4

(1st Cir. 1996))).

The portion of the statute on which the hospital focuses

its gaze is the introductory paragraph of a subsection that revises

the formula the Secretary used to calculate a hospital’s IME

adjustment under the modified reasonable cost system. See

42 U.S.C. § 1395ww(d)(5)(B). Congress’ prefatory instruction

regarding the computation of the IME adjustment merely directs the

Secretary, as a general matter, to calculate a hospital’s IME

adjustment using the formula instituted under the modified

reasonable cost system. See Oxford English Dictionary (2008)

(defining “compute” as to “determine by . . . mathematical

reckoning, or “to ascertain by a relatively complex calculation”).

Where Congress wished to modify that formula, it laid out a

specific exception to this general rule. See, e.g., 42 U.S.C.

§ 1395ww(d)(5)(B)(ii) (2008).

The legislative history of 42 U.S.C. § 1395ww(d)(5)(B)

supports this reading of the statute’s text. Congress’ main

purpose in addressing the IME adjustment was to increase Medicare’s

-24-
payments to teaching hospitals.17 To effect its will, Congress

altered certain determinate aspects of the formula the Secretary

used to calculate a hospital’s IME payment.18 See supra note 15

(explaining that Congress simply intended the statutory IME formula

to double the value of the teaching adjustment the Secretary used

under the modified reasonable cost system); see also 51 Fed. Reg.

6,755, 6,755 (Feb. 26, 1986) (same); 48 Fed. Reg. 39,752, 39,778

(Sept. 1, 1983) (same).

Nothing in the IME adjustment’s legislative history,

however, suggests Congress wished to abrogate the Secretary’s

authority to regulate the proper calculation of an indeterminate

variable, such as a hospital’s ratio of FTEs to beds, in the IME

equation.19 Indeed, no indication exists that Congress even

17
See supra note 15. Congress eventually determined that
this adjustment was too generous, in that it overestimated teaching
hospitals additional costs in providing inpatient care. See H.R.
Rep. 99-241, part 1, at 14-15 (1985), as reprinted in 1986
U.S.C.C.A.N. 579, 592-93. Accordingly, Congress reduced the level
of the adjustment, thereby saving the federal government $2.9
billion over a three year period. See id.
18
Congress did not choose to alter the indeterminate variable
in the Secretary’s established IME formula reflecting “the ratio of
[a] hospital’s full-time equivalent interns and residents to [its]
beds.” 42 U.S.C. § 1395ww(d)(5)(B)(ii); 47 Fed. Reg. 43296, 43,310
(Sept. 30, 1982); see also 42 U.S.C. § 1395ww(d)(5)(B) (approving,
as a general matter, the formula the Secretary previously used to
calculate the IME adjustment).
19
We reject RIH’s contention that the legislative history of
the Comprehensive Omnibus Budget Reconciliation Act of 1986
supports its restrictive reading of 42 U.S.C. § 1395ww(d)(5)(B) for
much the same reasons we rejected the hospital’s reading of the
statute. In lowering the value of the IME teaching adjustment
factor, Congress stated in a House Report: “The Committee has
stated the specific indirect teaching adjustment formula in the

-25-
considered the nuances involved in determining the FTE eligibility

of residents in teaching hospitals in which two very different

Medicare payment systems are in play. When faced with an

“interpretive issue” of “minor general significance” involving a

“highly technical and complex” statutory provision, we presume

“Congress would have wanted the agency to enjoy a degree of legal

leeway in specifying” that provision’s “scope.” Evans v. Comm’r,

933 F.2d 1, 7 (1st Cir. 1991). Accordingly, we reject the

hospital’s restrictive reading of the statutory text and hold that

Congress has not “directly spoken to the precise question at issue”

here. Carcieri, 497 F.3d at 26.

V.

We have concluded the Secretary’s reading of the FTE

regulation is permissible and that this regulation does not fly in

the face of substantive statutory commands. Still, the hospital

argues the Secretary’s interpretation of his FTE regulation is

counter to congressional policy underlying the statutory provision

law. There is no discretion on the part of the Secretary.” H.R.
Rep. 99-241, part 1, at 15 (1985), as reprinted in 1986
U.S.C.C.A.N. 579, 593. The hospital emphasizes the latter sentence
to the exclusion of the first in arguing the Secretary has no
authority to change the means by which Medicare determines a
hospital’s FTE count. But here again, Congress merely stated that
the Secretary may not alter the IME “formula” Congress established,
thus frustrating congressional efforts to lower hospitals’ IME
payments. Nothing in this language suggests Congress wished to
remove the Secretary’s authority to determine the proper
calculation of an indeterminate variable, such as a hospital’s
ratio of FTE residents to beds, in the statutory equation.
Although Congress had many opportunities to do so, it has “not seen
fit to question” this longstanding “administrative practice.”
Silverman v. Rogers, 437 F.2d 102, 107 (1st Cir. 1970).

-26-
for an IME payment, as well as the administrative rationale for

establishing the FTE regulation in the first place. See FEC v.

Democratic Senatorial Campaign Comm., 454 U.S. 27, 32 (1981)

(instructing lower courts to reject agency interpretations that

“frustrate the policy . . . Congress sought to implement”); Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (noting that

courts will not defer to the Secretary's interpretation where “an

alternative reading is compelled . . . by other indications of the

Secretary's intent at the time of the regulation's promulgation”).

Accordingly, we proceed to examine the purpose of the IME

adjustment and the FTE regulation at issue.

Congress “specifically excluded” the “direct and indirect

expenses associated with medical education activities” from

reimbursement under the new “prospective payment system.”20 H.R.

Rep. No. 98-25, pt. 1, at 140 (1983), as reprinted in 1983

U.S.C.C.A.N. 219, 359. At the same time, Congress mandated that

the Secretary continue to provide an IME adjustment to reimburse

teaching hospitals for the “indirect costs” of their “medical

education” programs. H.R. Rep. 99-241, pt. 1, at 14 (1985), as

reprinted in 1986 U.S.C.C.A.N. 579, 592. The hospital correctly

20
Medicare continued to reimburse hospitals’ direct medical
education expenses, such as “salaries for residents and teachers
and classroom costs,” on a reasonable cost basis. H.R. Rep. 99-
241, pt. 1, at 14 (1985), as reprinted in 1986 U.S.C.C.A.N. 579,
592; see also H.R. Rep. No. 98-25, pt. 1, at 140 (1983), as
reprinted in 1983 U.S.C.C.A.N. 219, 359; 48 Fed. Reg. 39,752,
39,762 (Sept. 1, 1983) (noting that Medicare would “continue” to
pay direct medical education costs “on a reasonable cost basis”).

-27-
notes that Congress viewed a hospital’s ratio of FTE residents to

beds as a “proxy” or means of estimating various “factors” that

“legitimately increase” teaching hospitals’ costs.21 H.R. Rep. No.

98-25, pt. 1, at 140-41 (1983), as reprinted in 1983 U.S.C.C.A.N.

219, 359-60; S. Rep. No. 98-23, 52 (1983), as reprinted in 1983

U.S.C.C.A.N. 143, 192; see also Oxford English Dictionary (2008)

(defining “proxy” as a “variable that can be used as an indirect

estimate of another variable with which it is correlated”). But

this fact alone, contrary to the hospital’s assertions, tells us

nothing about the type of resident activities Congress desired the

Secretary to include in his calculation of the FTE variable.

The IME adjustment’s legislative and administrative

history, however, indicates the adjustment was intended to

reimburse hospitals for the “increased patient care costs

associated with [their] teaching programs due to such factors as

increased diagnostic testing, increased numbers of procedures

prescribed, higher staffing ratios and a more severely ill patient

population.”22 H.R. Rep. No. 99-241, part 1, at 14 (1985), as

21
A teaching hospital’s IME costs are “defined in terms of
increased operating costs.” 51 Fed. Reg. 6,755, 6,755 (Feb. 26,
1986). These added costs “are not separately identifiable” on a
hospital’s “cost report” or other “accounting records.” Id.
Consequently, Medicare estimates this “incremental” increase in
operating costs by calculating a hospital’s level of “teaching
intensity.” Id. The ratio of a hospital’s FTE residents to beds
is the “proxy” Medicare uses “to measure teaching intensity.” Id.
22
See also H.R. Rep. No. 103-601, pt. 4 (1994), 1994 WL
410617 (suggesting Congress wished VA teaching hospitals to receive
the IME adjustment accorded to other teaching hospitals in light of
“the increased intensity, complexity and, therefore, cost, of

-28-
reprinted in 1986 U.S.C.C.A.N. 579, 592 (emphasis added); 51 Fed.

Reg. 16,772, 16,775 (May 6, 1986) (adding “more detailed medical

records” to this list); see also 51 Fed. Reg. 16,772, 16,775 (May

6, 1986) (noting that Congress established an IME adjustment

computed “in the same manner as the adjustment for those costs

under regulations in effect as of January 1, 1983” and that

“[u]nder those regulations” IME costs were “the increased operating

costs (that is, patient care costs)” associated with hospitals’

approved teaching programs) (emphasis added). Educational research

expenses do not directly increase the costs teaching hospitals

incur in providing patient care. As a result, we cannot say the

Secretary’s reading of the FTE regulation frustrates the policies

Congress sought to implement.

Nor do we conclude the original purpose of the FTE

regulation is at odds with the Secretary’s current reading of that

caring for [these hospitals’] patients”); Richard S. Schweiker,
Report to Congress: Hospital Prospective Payment for Medicare 48
(December 1982) (stating that IME costs “are higher patient care
costs incurred by hospitals with medical education programs” and
noting that the Secretary had developed “an adjustment methodology”
to reimburse “teaching hospitals” for their “higher patient care
costs”); 54 Fed. Reg. 40,286, 40,286 (Sept. 29, 1989) (noting that
hospitals with IME costs receive an additional Medicare payment and
explaining that “‘indirect costs of medical education’ means those
additional operating (that is, patient care) costs incurred by
hospitals” with teaching programs); 51 Fed. Reg. 6,755, 6,755 (Feb.
26, 1986) (“The indirect costs of medical education are increased
operating costs, that is, patient care costs, associated with
teaching programs.”); 45 Fed. Reg. 41,868, 41,869 (June 20, 1980)
(establishing an “automatic upward adjustment” to teaching
hospitals’ cost limits as these hospitals experienced added
“inpatient general routine operating costs generated by [their]
approved internship and residency programs”).

-29-
provision. The requirement that a resident be assigned to an area

of a teaching hospital subject to the prospective payment system is

predicated on the fact that certain hospital units continued to

bill Medicare under the reasonable cost system. See 48 Fed. Reg.

39,752, 39,778 (Sept. 1, 1983). Under the reasonable cost system,

Medicare automatically reimbursed teaching hospitals for their IME

expenses. See id. at 39,754 (noting that “reasonable costs include

all . . . indirect costs that are necessary and proper for the

efficient delivery of needed health services”). To avoid paying

the IME adjustment twice, the Secretary was required to exclude

residents assigned to non-PPS billing (i.e., reasonable cost

billing) units from a hospital’s FTE count. See id. at 39,778

(explaining that the IME adjustment “does not apply” to hospital

units that bill Medicare under the “reasonable cost” system because

Medicare’s “payments to those facilities already include” a

hospital’s IME costs).

Because residents assigned to a research rotation are not

assigned to a reasonable cost billing unit, the hospital argues

their work must count towards a hospital’s total number of FTEs.

We think the scope of the Secretary’s intent in establishing the

FTE regulation should be read more broadly. At base, the Secretary

was not concerned merely with whether a resident was assigned to a

reasonable cost billing unit. The purpose of the FTE regulation

was, instead, to exclude residents from a hospital’s FTE count who

did not contribute to the added costs, which the IME adjustment was

-30-
intended to reimburse. As we have already explained, the IME

adjustment’s legislative and administrative history adequately

support the Secretary’s conclusion that this provision was

intended to compensate teaching hospitals for added costs of

patient care unremunerated by the prospective payment system. The

Secretary’s current reading of the FTE regulation is consistent

with that intent.

Put simply, the Secretary’s interpretation of the FTE

regulation is not “arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).

We therefore “refuse to substitute our judgment” for that of the

Secretary. Natural Res. Def. Council, Inc. v. U.S. E.P.A., 824

F.2d 1258, 1293 (1st Cir. 1987); South Shore Hosp., Inc., 308 F.3d

at 97 (noting that our review, under the APA, is “tightly

circumscribe[d]”). For the above-stated reasons, we reverse the

ruling of the district court and remand for further proceedings not

inconsistent with this opinion.23

23
In the district court, RIH made an alternative argument
that some of its residents’ research time was related to the
treatment or diagnosis of particular patients. Thus, even under
the Secretary’s reading of the FTE regulation, the hospital
maintains this research time should count towards its total number
of FTEs. Because the district court did not reach this claim and
the hospital failed to raise it on appeal, we express no opinion as
to its merits. See In re Keeper of Records (Grand Jury Subpoena
Addressed to XYZ Corp.), 348 F.3d 16, 21 n.4 (1st Cir. 2003).

-31-